Statement of Financial Accounting Standards No. 157 - Paper Audit ...

Application to Liabilities
C39. For a liability, a fair value measurement assumes that the liability is transferred
to a market participant at the measurement date and that the nonperformance risk
relating to that liability (that is, the risk that the obligation will not be fulfilled) is the
same before and after its transfer.
The Transfer
C40. Because the liability is transferred to a market participant, the liability continues;
it is not settled with the counterparty. The Board acknowledged that in some cases, the
reporting entity might not have the intent to transfer the liability to a third party. For
example, the reporting entity might have advantages (or disadvantages) relative to the
market that would make it more (or less) beneficial for the reporting entity to perform
or otherwise settle the liability using its own internal resources. However, the Board
agreed that the fair value of the liability from the perspective of a market participant is
the same regardless of how the reporting entity intends to settle the liability.
Conceptually, a fair value measurement provides a market benchmark to use as a basis
for assessing the reporting entity’s advantages (or disadvantages) in performance or
settlement relative to the market. Specifically, when a liability is measured at fair value,
the relative efficiency of the reporting entity in settling the liability using its own
internal resources appears in earnings over the course of its settlement, not before.
C41. In the context of both assets and liabilities, paragraph 33 of Concepts Statement 7
explains:
If the entity measures an asset or liability at fair value, its comparative
advantage or disadvantage will appear in earnings as it realizes assets or
settles liabilities for amounts different [from] fair value. The effect on
earnings appears when the advantage is employed to achieve cost savings
or the disadvantage results in excess costs. In contrast, if the entity
measures an asset or liability using a measurement other than fair value, its
comparative advantage or disadvantage is embedded in the measurement
of the asset or liability at initial recognition. If the offsetting entry is to
revenue or expense, measurements other than fair value cause the future
effects of this comparative advantage or disadvantage to be recognized in
earnings at initial measurement.
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